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Should You Rollover Your 401(K) Plan, or 403(b) Plan?

When you leave employment at your job, either by retirement or by going elsewhere, you will have several options on what to do with the retirement plan you have been participating in. These include:

1. Leave your account where it is.

2. Transfer it over to the new employer plan (if one is available).

3. Cash it out.

4. Roll it over to a traditional "self-directed" IRA.

1. Leave your account where it is.

If your investments are performing quite well, or if you are not sure what to do, you can leave it right where it is. This would allow you to avoid any charges or fees of moving your assets into other accounts.

However, before you decide to stay in your old 401(k) plan make sure you determine that you will not be paying any fees or expenses by staying in the plan. You also need to know whether the employer is paying any of the administrative expenses associated with the plan on behalf of the participant, or if you (the participant) are paying these expenses.

2. Transfer it over to the new employer plan.

You could do this if you feel you have some good choices within the new plan. Make sure you understand what is available. This also would allow you to avoid any charges or fees found in rolling it over to a “self-directed” IRA. However, you are limiting yourself to ONLY the investment choices within the new plan.

3. Cash it out.

This is probably the choice that would hurt you the most. Not only would you have to pay taxes on the amount cashed out, but you would also be hit with a 10% penalty (if you are under age 59 ½). The only reasons you should ever consider this option would be to avoid bankruptcy, avoid foreclosure on your home, or life-and -death medical situation. Any other excuse doesn’t hold water.

4. Roll it over to a traditional "self-directed" IRA.

This is the option most investor should choose. Why? First of all, you now have a much wider choice of investments on where to put this money. Secondly, assets in an IRA can more easily be coordinated with your overall game plan toward your retirement goals. You can consolidate all your retirement assets under a single umbrella and not have to worry about keeping track of different distribution requirements and withdrawal options for each plan.

A typical 401(k) plan does not allow taking distributions over an extended period of time, as is permitted with an IRA. Some 401(k) plans impose far more restrictive rules than even the IRS does with IRAs. You have no withdrawal restrictions with an IRA, whereas company plans may have some.

If you have questions about your investments, IRAs are handled by you and your financial Coach, while company plans, such as 401(k)s are typically handled by clerks in the Human Resources Department.

Investing in a Rollover IRA may benefit you by having lower sales charges for contributions you make into other Individual Roth IRA accounts, or college 529 plans for your kids, or other mutual fund investments.

If you don’t need the money inside of your own IRA you can “Stretch” it to your grandchildren., but you cannot do this with a 401(k).

Limitations and Early Withdrawals:

Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.

Retirement Plans:

Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, it taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.

Roth IRA:

Converting from a traditional IRA to a Roth IRA is a taxable event.

A Roth IRA offers tax free withdrawals on taxable contributions.

To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

Should You Rollover Your Pension into Your IRA?

Traditional Pensions used to be much more common than they are today. They have been replaced, for the most part, by defined contribution plans like 401(k) plans. Most remaining pension plans can be found through larger institutions such as labor unions or government workers that might include city workers, county employees, state government employees, and even federal employees.

Pensions will typically pay the retired employee a monthly defined amount for the rest of their life. This is known as a pension annuity distribution. If the pension holder were to pass away, then their spouse would continue to receive half of the amount for the rest of their life. Some pensions will allow your spouse the receive the full benefit amount, but you would have to take a lesser monthly amount in the beginning.

Unfortunately, if you and your spouse would both pass away, the remainder of the pension benefit would go back to the company. If you have surviving children, they will not receive a dime from this pension. What’s the point of having an income for the rest of your life if you are in retirement for just a few short months. If you had rolled the pension into an IRA you could have elected the children or grandchildren as beneficiaries, or it could have been donated to your Church or your favorite charity.

Not all pensions are allowed to take lump sum options to roll them over. For most Teachers, through their State sponsored pensions only have the option to take the monthly annuity benefit.

It is very common for city governments to provide pension benefits for both police officers and firefighters. In most cases it is possible for these employees to start receiving the pension benefits well before age 59 ½. Some may have a mandated requirement age, which may be well ahead of age 59 ½. This monthly pension check may be just what they need as they transition into their retirement or perhaps, a second career choice. They may need this pension money to supplement their income as a necessity because of a lack of income from other sources. If they had rolled the lump sum pension into an IRA, then IRS laws specify that they would not be able to take distributions prior to age 59 ½ without penalty.

If you are not a teacher or part of your city’s police force or fire department, you b probably have two choices when it comes to your pension plan. You can take the monthly distribution and “play-it-safe”, or you could take control of your pension by rolling over the lump sum into an IRA. Let’s take a look at these two options and see which one is in your best interest.

If you choose to take your monthly pension annuity distribution you will have guaranteed income for the rest of your life. This makes it easy to budget your lifestyle in your retirement. There is a certain amount of security in having a guaranteed income every month and it is also reassuring that your spouse will continue to receive benefits after you pass away. However, for that security, what are you giving up?

Before deciding to take the regular monthly distribution consider your unique situation. Consider the financial strength of the company you work for. There are many stories about companies going bankrupt and unions and government budgets having their pension plan payouts drastically under-funded and often time compromised. You may still receive a monthly pension check but the amount may be only a fraction of what you thought you were going to get all those years ago when you put your financial game plan in action.

By rolling your lump sum pension into an IRA you are taking control of your money. You are now in control of how much of a distribution you want to take each month, and this can be flexible and change from month-to-month. You will also have the option of picking your beneficiaries for primary (spouse) and contingent (children). Your loved ones will continue to enjoy the money that is left over when you pass on. Your lump sum pension rollover can now be included in other accounts, such as Traditional or Roth IRAs, 401(k) plans or 403(b) plans, or 457 Deferred compensation plans to plan your overall retirement strategies. Your pension being rolled over allows this money to be passed on to continue to grow and work for your loved ones well past your own lifetime. Rolling over your lump sum pension is the wisest choice for most people.